[Senate Hearing 106-516]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 106-516
 
   SWINDLING SMALL BUSINESSES: TONER-PHONER SCHEMES AND OTHER OFFICE 
                              SUPPLY SCAMS

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 28, 2000

                                     




                                     

              Printed for the Committee on Small Business

                                 ______



                     U.S. GOVERNMENT PRINTING OFFICE
64-206 CC                    WASHINGTON : 2000
_______________________________________________________________________
   For sale by the Superintendent of Documents, Congressional Office
         U.S. Government Printing Office, Washington, DC 20402




                      COMMITTEE ON SMALL BUSINESS
                       ONE HUNDRED SIXTH CONGRESS

                              ----------                              
                CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana                JOHN F. KERRY, Massachusetts
PAUL COVERDELL, Georgia              CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah              TOM HARKIN, Iowa
OLYMPIA J. SNOWE, Maine              JOSEPH I. LIEBERMAN, Connecticut
MICHAEL ENZI, Wyoming                PAUL D. WELLSTONE, Minnesota
PETER G. FITZGERALD, Illinois        MAX CLELAND, Georgia
MIKE CRAPO, Idaho                    MARY LANDRIEU, Louisiana
GEORGE V. VOINOVICH, Ohio            JOHN EDWARDS, North Carolina
SPENCER ABRAHAM, Michigan
                     Emilia DiSanto, Staff Director
                      Paul Cooksey, Chief Counsel
    Patricia R. Forbes, Democratic Staff Director and Chief Counsel

                                  (ii)




                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Bond, The Honorable Christopher S., Chairman, Senate Committee on 
  Small Business, and a United States Senator from Missouri......     1

                           Witness Testimony

Bailey, Joan, Administrative Assistant, Brownstone Real Estate 
  Company, Hershey, Pennsylvania.................................     5
Easton-Saunders, Linda, Database/LAN Administrator, Prospect 
  Associates, Silver Spring, Maryland............................    14
Everding, George, Communications Coordinator, Feed My People, St. 
  Louis, Missouri................................................    22
Grosfeld, Peter, Miami, Florida..................................    24
Duffy, William R., President and Chief Executive Officer, Imaging 
  Supplies Coalition for International Intellectual Property 
  Protection Inc., Lexington, Kentucky...........................    30
Burke, Tricia, Vice President, Office Equipment Company, Inc., 
  Louisville, Kentucky, on behalf of Independent Office Products 
  & Furniture Dealers Association, Alexandria, Virginia..........    39
Bernstein, Jodie, Director, Bureau of Consumer Protection, 
  Federal Trade Commission, Washington, D.C......................    51

          Alphabetical Listing and Appendix Material Submitted

Bailey, Joan
    Testimony....................................................     5
    Prepared statement and attachment............................     8
Bernstein, Jodie
    Testimony....................................................    51
    Prepared statement and attachments...........................    54
Bond, The Honorable Christopher S.
    Opening statement............................................     1
    Attachment to statement......................................     4
Burke, Tricia
    Testimony....................................................    39
    Prepared statement and attachment............................    42
Coverdell, The Honorable Paul
    Prepared statement...........................................    83
Duffy, William R.
    Testimony....................................................    30
    Prepared statement...........................................    34
Easton-Saunders, Linda
    Testimony....................................................    14
    Prepared statement and attachment............................    17
Everding, George
    Testimony....................................................    22
Grosfeld, Peter
    Testimony....................................................    24
    Prepared statement...........................................    27
Kerry, The Honorable John F.
    Prepared statement...........................................    84

                        Comments for the Record

United States Postal Inspection Service, Washington, D.C., 
  statement and attachment.......................................    86
Xerox Corporation, Rochester, New York, statement................   118


                      SWINDLING SMALL BUSINESSES:
                     TONER-PHONER SCHEMES AND OTHER
                          OFFICE SUPPLY SCAMS

                              ----------                              


                        TUESDAY, MARCH 28, 2000

                              United States Senate,
                               Committee on Small Business,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 9:43 a.m., in 
room SD-562, Russell Senate Office Building, the Honorable 
Christopher S. Bond (Chairman of the Committee) presiding.
    Present: Senator Bond.

    OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND, 
  CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED 
                  STATES SENATOR FROM MISSOURI

    Chairman Bond. Good morning. The hearing will come to 
order. Unfortunately, my colleague and Ranking Member, Senator 
Kerry, has a Commerce Committee hearing in which he is deeply 
involved, so he will not be able to join us.
    Last fall this Committee commenced a series of hearings on 
deceptive or unfair trade practices that are particularly 
harmful to the small business community. Our first hearing 
focused on slotting fees, a method that large companies use to 
preclude competition from small businesses getting onto 
supermarket shelves. The Committee then followed up with a 
hearing on unscrupulous web site creators cramming unauthorized 
charges onto the telephone bills of unsuspecting small 
businesses.
    Today's hearing is the third in this series. This morning 
we will address another scam targeting small businesses; the 
fraudulent telemarketing of office suppliers, particularly 
copier and printer toner. While the fraudulent telemarketing of 
toner cartridges may at first glance seem to be ``no big 
deal,'' I am here to tell you that it is actually an 
extraordinarily widespread problem, and to be this high on our 
agenda it has to be. The Committee has received estimates that 
this type of fraud victimizes businesses up to $250 million per 
year.
    The toner cartridge in my hand is the tool scam artists use 
to ensnare small businesses. This is what is being sold, and 
these cartridges are usually of very inferior quality and are 
sold at very inflated prices.
    The FTC has several ongoing investigations of companies 
that deceptively cold-call businesses to sell toner cartridges. 
According to the FTC, the offers are rife with fraudulent 
statements and misrepresentations. The bottom line on these 
types of scams is that small businesses and non-profit entities 
are shipped low-quality office supplies that they did not order 
at grossly inflated prices, sometimes up to 20 times 
conventional prices.
    Our witnesses today will testify about the many different 
methods these scam artists use to persuade small businesses to 
accept shipments of vastly overpriced toners. In many cases, 
the telemarketers will expressly or implicitly represent that 
they are associated with the business' regular supplier of 
photocopier toner or the photocopier manufacturer. The 
telemarketers may also represent that they are calling to 
confirm an order placed by an employee's predecessor when no 
order had been previously placed.
    In addition, the companies may call a business to receive 
the name of an employee and then ship unordered merchandise and 
an invoice containing that particular employee's name. It is 
not uncommon for telemarketers to send a free gift to employees 
with whom they have spoken so that the employees feel obligated 
to pay the invoice they receive.
    One of the most common practices is for telemarketers 
falsely to claim that prices have or are about to increase, but 
as a courtesy--what a courtesy--an order has been reserved for 
the business at the ``regular'' price. It would be more 
appropriate to state that the prices are highly ``irregular.'' 
As some of our witnesses will testify today, the prices of the 
toner cartridges sold by telemarketers are substantially higher 
than prices for similar products available from reputable 
suppliers.
    Once the telemarketer has scammed a business into agreeing 
to accept the delivery of the toner, it may use several other 
methods to coerce businesses into paying. Typically, invoices 
are sent a week following the unordered merchandise as the 
inflated price is not as obvious after the merchandise has been 
stocked and there is a reasonable chance that it has already 
been used.
    Moreover, the fraudulent telemarketers usually spend 
significant time and energy on collection efforts including, 
drafting invoices containing unenforceable contract terms to 
coerce businesses into paying; stamping ``Past Due'' on first-
time invoices; resorting to bogus or real collection agencies; 
threatening legal action; negotiating lower prices; or claiming 
that if the items are to be returned, the company will be 
charged a ``restocking fee.''
    Finally, if the telemarketer finds a business that is 
willing to pay for the overpriced toner, a telemarketer will 
``reload'' and send unordered merchandise and invoices as long 
as the business continues to pay.
    While the FTC and certain States' attorneys general have 
been active in prosecuting businesses engaged in deceptive 
office supply sales, they have limited resources. To be 
successful in putting these scam artists out of business it is 
imperative that the Federal Government act as an information 
clearinghouse. We must ensure that small businesses and small 
not-for-profits are aware of the scams, and inform them how 
they can protect themselves. That is why we are holding the 
hearing today.
    We do not need to change existing law to provide the 
authority to Federal law enforcement agencies to prosecute 
fraudulent telemarketers. The FTC already has the authority to 
seek civil penalties. The Department of Justice has the 
authority to prosecute criminally bad actors. The FBI and the 
Postal Inspection Service also have the authority to 
investigate the fraudulent sale of office supplies.
    The FTC has been particularly active in bringing 
enforcement actions in this type of fraud, and their efforts 
are ones we commend. Nevertheless, it appears that even 
companies that are successfully prosecuted often simply change 
their business name and continue the same fraudulent 
activities. The Committee is interested in hearing about what 
the FTC and other agencies are doing to decrease recidivism, 
and what Congress can do to assist in their efforts. My 
personal view is that that might begin to border on the 
criminal responsibility side.
    Additionally, the Committee has learned that many States' 
attorneys general may not have appropriate statutory authority 
to seek civil penalties. While most States have ``Little FTC 
Acts,'' which prohibit deceptive business practices, some of 
these acts may not apply to sales of business to business. 
Accordingly, we intend to work with States through their 
legislatures, Governors, and attorneys general to suggest to 
them that this business-to-business scam merits their attention 
as well.
    The FTC has been extremely helpful in providing the 
Committee with background information on this problem and their 
enforcement actions. I am especially grateful for the 
extraordinary effort of FTC Chairman Robert Pitofsky, and FTC 
staff members Elaine Kolish, James Reilly Dolan, Elena Paoli, 
and Matthew Downs.
    [An attachment to the statement of Senator Bond follows:]


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    Chairman Bond. We are fortunate to have four panels this 
morning. Our first panel consists of representatives of two 
small businesses, and a non-profit organization that were 
targeted by fraudulent telemarketers. Our second panel is an 
ex-employee of a telemarketing company who will give us a look 
inside as to how these operations work. The third panel 
consists of a representative of the ISC, and a reputable small 
office supply firm. Finally, a fourth panel, a representative 
of the FTC who will give us the results of its recent 
enforcement actions and a new grass roots education initiative. 
We look forward to hearing from and working with each of our 
witnesses.
    Accordingly, to begin the hearing I would like to call as 
the first panel Ms. Joan Bailey, administrative assistant, 
Brownstone Real Estate Company, Hershey, Pennsylvania; Mrs. 
Linda Easton-Saunders, data base and LAN administrator, 
Prospect Associates, Silver Spring, Maryland; and Mr. George 
Everding, communications coordinator, Feed My People, St. 
Louis, Missouri.
    As you come forward I am going to submit for the record a 
statement from Senator Coverdell.
    [The prepared statement of Senator Coverdell is in the 
Appendix:]
    Chairman Bond. I also submit for the record a statement 
from the Xerox Corporation in Rochester, New York; and a 
statement from the Postal Inspection Service in Washington, 
D.C.
    [The statements are in the Comments for the Record:]
    Chairman Bond. Good morning and welcome. Ms. Bailey, would 
you care to begin?

STATEMENT OF JOAN BAILEY, ADMINISTRATIVE ASSISTANT, BROWNSTONE 
                 REAL ESTATE COMPANY, HERSHEY, 
                          PENNSYLVANIA

    Ms. Bailey. Thank you. First off, I want to introduce our 
firm. I am with Brownstone Real Estate Company, an independent 
real estate brokerage firm in Hershey, Pennsylvania. We have 
been in business since 1971. I joined the firm in 1995 and have 
acted as the administrative assistant since 1998. My 
responsibility include ordering and monitoring inventory of 
office forms, supplies, and items for computers, fax machines, 
and our copiers.
    At this time I would like to explain my recent experience 
with a distribution company that solicited us for business. On 
July 7, 1999 I received a phone call. As per standard practice 
I identified myself and asked the caller how I could be of 
assistance. A female responded, ``Hi, Joan, I am calling about 
your Lanier copier. What is the serial number on your copier?''
    My initial response was, ``Why do you need that?''
    I was told there was a pending price increase on toner and 
the caller wanted to get me under the old pricing of $549. I 
asked how much of a price increase and was quoted a 
ridiculously high amount like $800--a very drastic difference.
    I told the caller I would have to verify this offer with 
our accountant and asked her to please hold. I explained this 
offer, as I understood it, to our accountant--toner prices were 
about to increase for our Lanier copier, but if we acted 
immediately we could still get the old pricing. The accountant 
and I compared the offer with our most recent purchase of 
similar toner which we purchased on May 18, 1999. At that time 
we had paid $695 for one case of four toner bottles. So this 
was a natural assumption on my part that this was a case. We 
were not in dire need of toner at the time, but given the 
price, both my accountant and I felt that it would be 
beneficial to make this purchase at this time.
    When I returned to the person who was on hold, who I 
believed to be a Lanier representative, I informed her we would 
take advantage of the offer. I, of course, gave her my name and 
complete mailing address.
    I did not give another thought to this purchase until the 
next day, July 8, when a gentleman called identifying himself 
as ``Bill.'' He told me he was calling to verify my toner 
purchase, which I did confirm. Again, I did not think anything 
of this out of the ordinary because Bill is the name of our 
copier repairman with Lanier. Coincidence? I do not know. I do 
remember thinking it a bit odd that Bill was calling in 
reference to a toner order, but maybe Bill made a job change. I 
do not know.
    A week later, about July 19, I received another call from 
Lanier--this one from our representative, Brooks Bracken, who I 
had spoken with many times. She wanted to know if we needed 
anything in the way of supplies, particularly toner. I asked, 
``How many times is Lanier going to call wanting to know if we 
need toner? How many copies do you think we make in a week?''
    She informed me this was her first call she had made in 
this current quarter, and furthermore, she was the only one to 
contact me for an order. My first red flag went up.
    She immediately wanted to know who had called and how they 
represented themselves. I repeated the chain of events ending 
with how I purchased the toner. This was when I first heard the 
term ``Paper Pirates.'' I was furious, embarrassed to think I 
was swindled by this fast-talking rep, but our only consolation 
at this time was the fact that we had not yet received it and 
we were not out of any money. Now my true Lanier representative 
faxed me completed details educating me on what I had just 
fallen victim to. With her help and per enclosed instructions I 
began to prepare for when this toner finally arrived.
    That was on or about July 20, 1999. I was shocked to find 
the box contained only one bottle of toner, not the case of 
four I had expected. The enclosed packing slip was not from 
Lanier, but rather Global Distribution Center located in Marina 
Del Rey, California.
    Chairman Bond. This is what you received?
    Ms. Bailey. Right. An invoice was not included. I have 
since learned that is part of the scam--hoping that you would 
open the package, use it, and then, of course, feel obligated 
to pay. Thanks to Lanier that was not going to happen. I made a 
copy of the toner label and the packing slip; packed the toner 
back up and waited for the invoice to arrive.
    On or about August 2, 1999, 13 days later, the invoice 
arrived separately. I was appalled at the charge of $549 for 
this single bottle of toner. In addition there were $60.40 in 
shipping charges that were never disclosed in our original 
conversation. August 5, per Lanier's instructions, I sent a 
brief but direct letter to Global Distribution Center. 
Basically stating, ``You misrepresented the sale.'' Get your 
things within 30 days or we are going to get rid of it. ``We do 
not want it.'' But I did forget in my haste to send it 
certified.
    On that same day I sent a copy of this letter, all the 
pertinent information: packing slip, invoice, and toner label, 
to the names and organizations on the list I received from 
Lanier which was part of this. So to get rid of this I just 
made a file, ``Information'' and filed it.
    August 9 we received an invoice for $609.40. I told the 
accountant, forget it, we are not paying it. Disregard it. 
August 12 our accountant received a call from Kelly Glen of 
Global Distribution Center regarding payment of this toner. Our 
accountant informed her we sent her a letter and we had no 
intention of paying it. Ms. Glen claimed Global had not 
received it. We asked for the fax number and said we would 
gladly fax that letter over, at which time she informed me 
according to terms and conditions we had 15 days. We were past 
that 15 days. We told her basically, end of discussion. The 
toner is here. You come get it. We are not paying for it, and 
we are not paying anything else.
    When she received this fax Kelly Glen responded with a 
letter dated August 12 very different to the events that 
occurred, basically outlining they were up front, they always 
identify themselves, they made it clear how many it was. Not 
the case. August 16, a United Parcel service tag was issued and 
the toner was finally picked up. On that same day however we 
did receive another invoice for $609.40 and we figured it just 
crossed in the mail. August 26, we received a final invoice 
stamped past due. We responded on August 27, by remailing 
everything we had sent, a copy of our letter, Kelly Glen's 
letter, and again stating we are not paying this. We are done.
    Basically we thought that was the end, and as far as that 
company, it was. But it was not the end of the calls from the 
toner-phoners. To this day I receive many calls. Again they do 
not identify themselves or they will just give a first name, 
but do not give a company name. They use similar lines, we want 
to call about your copier, do you have that number? And all we 
have to basically say is, ``Don't you have it? You would if you 
were my representative.'' What I have learned is, it is very 
easy to really get rid of them. You ask what their name is, 
they hang up. ``Who are you with?'' They hang up.
    So I feel lucky that Lanier educated us, and that we were 
not taken by this. There are similar incidents that have 
happened, not just toner-phoner. In conclusion, I would like to 
express my need for the continued investigation, not only of 
the toner-phoner and office supply scams but all who are 
constantly trying to swindle small businesses. This heightened 
distrust of business relationships has a severe impact on the 
workplace environment. Basically, can we not trust anyone?
    Thank you.
    [The prepared statement and attachment of Ms. Bailey 
follow:]

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    Chairman Bond. Thank you very much, Ms. Bailey. Thank you 
for going through the steps with us and outlining how your real 
supplier was very helpful. We congratulate you on standing up 
to them.
    Ms. Linda Easton-Saunders.

STATEMENT OF LINDA EASTON-SAUNDERS, DATABASE/LAN ADMINISTRATOR, 
          PROSPECT ASSOCIATES, SILVER SPRING, MARYLAND

    Ms. Easton-Saunders. Good morning. I am Linda Easton-
Saunders and I have been employed with Prospect Associates for 
the past 5 years. I am the data base/LAN administrator in the 
Information Technology department. As part of my job I cost and 
purchase computer and printer hardware, software, and supplies 
for the company.
    On approximately October 3, 1997, I received a telephone 
call from a female from WorldTech Computers selling toner 
cartridges. I recall that the female was very rude after I told 
her that we did not buy toner from phone calls. She said, 
``What kind of manager are you? Don't you want to save your 
company money?'' I again told her that we were not interested.
    A day or so later I was paged while I was in a meeting to 
answer a phone call from a man from the same company. I told 
him that I was in a meeting and that we only buy authentic HP 
toner, not remanufactured. A man identifying himself as Sam 
Million, office manager, called back later. I told him that we 
only buy HP and that I did not appreciate his salespeople and 
their attitudes. He said that he did not train their people 
that way and would talk to them.
    He then said they were working with HP on a pilot program 
with a new type of toner which would produce more copies since 
it had 300 grams instead of 100 grams. Also the drum was longer 
lasting and he was willing to invite us to try it saying, ``How 
can we sell it if you do not try it?'' He said that if we did 
not like it after trying it we could send it back and owe 
nothing. He also offered to send a promotional gift, a clock 
radio, along with the toner, that I could keep whether we kept 
the toner or not. I then said, go ahead, just to get rid of 
him.
    Not being sure that this was an HP promotion I went on the 
Internet to the HP site to see if I could find out anything 
about this new pilot program. Finding nothing on this, I called 
HP to ask them about it and was told that this was not an HP 
program.
    HP put me in contact with Thomas G. Byrne, an investigator 
with M. Morgan Cherry & Associates, who told me to accept the 
toner cartridge and call him when it arrived. I received the 
Laserjet 5Si MX toner cartridge on October 16, 1997, via UPS 
and called Mr. Byrne. I recall meeting Mr. Byrne and talking to 
him about my experience and at some point giving him the toner, 
but I do not have the dates when this occurred documented.
    I was sent a fax on October 20, which gave me the e-mail 
address and fax information for Toni Berria, HP's supplies 
operations person. On October 21, I sent an e-mail to Toni 
advising her that I had received the invoice from WorldTech for 
$297.50. This price was double the price that I normally pay 
for the same toner. I mentioned in the e-mail that there were a 
couple of sentences on the back of the invoice that I could 
raise an objection with. One of them is the SOLE AGREEMENT 
which is on the terms and conditions up here on the exhibit.
    I also told Ms. Berria that WorldTech had represented the 
toner as being HP toner and not remanufactured toner and on the 
front of the invoice it said, ``LASERJET means high 
remanufactured quality.'' I felt that this was something that I 
could object to as I did not agree that the invoice supersedes 
anything told to me over the phone.
    On October 27, I called and talked to Paul Derek who 
claimed to be the general manager of WorldTech. I informed him 
that I was not happy and wanted to talk to Sam Million, office 
manager, to tell him that he had misrepresented their product. 
Mr. Derek informed me that he was Mr. Million's boss. I let him 
know that Mr. Million had told me their product was HP toner 
and it was not remanufactured, as I had informed Mr. Million 
that we only buy HP toner and do not purchase remanufactured 
toner.
    I also informed him that Mr. Million had stated that 
WorldTech was selling these toners under a pilot program 
approved by HP. Mr. Derek appeared to be upset stating that Mr. 
Million cannot do this as it is illegal. He went on to state 
that he was going to reprimand Mr. Million today and Mr. 
Million would be suspended.
    I asked Mr. Derek to explain further about the toner. He 
said that the parts are remanufactured, the drum has been 
recoated and is stronger than HP's, which makes it last longer. 
They put 300 grams of microfine toner, approved by HP, in their 
cartridges instead of the 150 grams which is put in HP's 
cartridges. Comparing apples to apples, HP toner will render 
11,000 to 12,000 copies while their toner will render around 
30,000.
    He stated that they have been in business for over 20 years 
and HP approves their product. He even told me to check with 
HP. He asked that I try the product and offered to lower the 
price to $240 including shipping and handling. He also stated 
that if I liked the product he would keep the $240 for future 
orders.
    On October 30, 1997, M. Morgan Cherry & Associates sent 
Prospect a check for $240 to cover the cost of the toner 
cartridge that was received. Prospect in turn cut a check to 
WorldTech Computers to pay for the toner.
    On November 18, 1997, I received a call from WorldTech. The 
man on the other end said he was my toner representative. He 
mentioned receiving our check and something about closing out 
the account, which confused me. He then said that WorldTech was 
going to send me five cartridges because they have a minimum 
order and that the one we received was only a trial. This 
statement angered me and I said, ``NO, we do not want any more 
cartridges.'' He restated that they have a minimum order. In my 
anger, I was extremely rude and said some bad words and said 
that I did not care about his minimum order. I do not want any 
more cartridges. Take us off of your list. Do not call me any 
more. He was taken aback and then hung up.
    I did not hear from WorldTech again until about a year ago. 
The person said she was from WorldTech and she wanted to know 
what type of printer we had. The name rang a bell and I 
immediately said that I had dealings with them before and that 
I did not want to buy any toner from them. The person hung up.
    I receive many phone calls from people trying to sell toner 
cartridges. Most of them use similar tactics as WorldTech's. 
Some are quite creative and change how they approach their 
caller. Some will talk as if they are a long-standing supplier, 
when in fact you have never heard of them. Many will start out 
saying they had a gift they want to send and ask which one you 
would prefer, like the computer cleaning supply vendor that 
said she had a sports cap and which team did I want on it. When 
I told her I have never done business with her company before 
and did not plan to, all of a sudden the niceness went away. 
She was no longer my long lost buddy, and hung up.
    I have learned to tell these people that we have a contract 
with a vendor already and do not wish to purchase any from 
them. Unfortunately, not all small businesses are aware of the 
scams out there and get caught by these companies. They are 
cunning and continually changing their tactics to catch the 
consumer unaware.
    These companies have been doing this for over 30 years that 
I can recall going back to when I was an office manager at a 
small plastics plant back in Michigan. I do not know what you 
can do to stop these people but I hope you will continue to 
look into this problem and come up with a solution.
    Once again, thank you for the opportunity to testify before 
your committee today.
    [The prepared statement and attachment of Ms. Easton-
Saunders follow:]


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    Chairman Bond. Thank you very much for providing us that 
story, Ms. Easton-Saunders, and thank you for being strong with 
those people. Unfortunately, a few bad words apparently is not 
enough to discourage them.
    Now let us turn to Mr. Everding. Welcome.

STATEMENT OF GEORGE EVERDING, COMMUNICATIONS COORDINATOR, FEED 
                 MY PEOPLE, ST. LOUIS, MISSOURI

    Mr. Everding. Thank you, Mr. Chairman, for allowing me to 
testify at this hearing. My name is George Everding and I live 
in St. Louis, Missouri. I retired from the U.S. Navy after 
having served over 32 years of active duty as an officer and 
enlisted man.
    For almost 15 years I have been a volunteer at Feed My 
People, a charity organization located in St. Louis County. 
Feed My People is dedicated to feeding the poor and hungry, and 
to helping them become independent, self-supporting citizens. 
In addition to food, clothing and help with utility bills, we 
provide budget and job search counseling and a variety of other 
services. Our board of directors is made up of representatives 
from over 25 churches of various denominations.
    I am the communications coordinater at Feed My People. 
Among my duties is the maintenance and support of computers, 
copiers, and other office equipment. Feed My People has over 
300 volunteers and only five paid employees, so we have 
different volunteers at the reception desk each day. Sometime 
in 1997 our volunteer receptionist received a call from a 
representative of Ikon Supply Service. He asked our 
receptionist what kind of office copier we were using. She 
looked at our copier and told him the make and model number 
which was printed on the side of the machine.
    When he asked who did the ordering of office supplies she 
transferred the call to me. He started the conversation by 
saying that there would soon be a price increase in the cost of 
the Xerox dry toner cartridges we used in our copier. Since he 
seemed to be familiar with our equipment I assumed that he was 
from Ikon Office Solutions, a supplier with an office in our 
local area.
    The caller offered a special price of $329 if four toner 
cartridges were ordered. His implication was that the $329 was 
for the box of four toners. This would have resulted in a price 
of about $80 per cartridge, a price somewhat less than we had 
been paying. Since we were in need of toner at that time I 
consented to order four cartridges.
    Shortly after this I went into the hospital for emergency 
repair of an aortic aneurysm. When I returned a month or so 
later Shirley Beeson, Feed My People treasurer, said she had 
been receiving several collection calls from Ikon Supply 
Service in California demanding payment for toner cartridges. 
She had no record of having received an invoice or a bill from 
them so I asked Ikon to fax a copy of the invoice. We received 
an invoice for two dry ink cartridges at $329 each. None of our 
volunteers could remember having received a package from Ikon 
but I found two cartridges in our storeroom so I told Shirley 
to pay the bill. First mistake.
    In March or April 1998 Shirley began to receive calls from 
a Steve Nelson asking for payment for four cartridges 
supposedly shipped in December 1997. This time I asked for a 
UPS receipt as well as a copy of the invoice. We received 
invoice number 98775 for four cartridges at $329 each for a 
total of $1,316, and a UPS receipt. The UPS receipt indicated 
that a package had been delivered on December 10, 1997, but did 
not indicate the weight or size of the package. And it was a 
copy of a copy and illegible in some places. I now believe that 
that UPS receipt was for the two cartridges we had received 
earlier. But at the time we considered the UPS receipt proof 
that we had received the package and no way of proving that we 
had not received the cartridges, so we mailed them a check. 
Second mistake.
    Several months later Shirley started to receive calls from 
an Ikon representative claiming that we had ordered 12 
cartridges and asking for payment of $987 for three cartridges 
he claimed were shipped. He became rude and threatening, 
probably thinking that he could frighten her into sending 
another check.
    I then addressed a letter to the CEO of Ikon Supply Service 
stating all the things that I have just mentioned here and 
ended it by writing: ``We are a charitable organization 
operating on a very limited budget and supported solely on 
donations by individuals and small companies. We cannot 
understand why you would want to take advantage of someone like 
us. By copy of this letter we are asking the Los Angeles County 
District Attorney's Office to investigate this situation for us 
and to determine why we were billed $1,964 for six cartridges 
worth at the most $360. A copy of this letter is being sent to 
the Better Business Bureau and the Conoga Park Chamber of 
Commerce.''
    The Los Angeles County District Attorney referred my letter 
to the Postal Inspection Service. On September 10, 1999, I 
received a phone call from Mr. C.F. Dudley, a postal inspector. 
In response to his questions I repeated most of what I have 
already said here. He said they were taking action against 
Ikon. Apparently they had swindled others.
    I have since learned from a news article dated March 16, 
2000, that William H. Chatham, the owner of Ikon Supply 
Service, was sentenced to 300 hours of community service and 
ordered to pay $7,500 in fines and $20,428 in restitution to 
the Naperville, Illinois office of Hartford and Feed My People, 
thanks to the investigative service. Now we have not seen any 
of this money. The two checks we sent to Ikon were endorsed by 
William H. Chatham. If Mr. Chatham is looking for a place to 
perform his community service, Feed My People is, as always, 
looking for volunteers to help us meet our goals. I have got 
several jobs I can think of for him.
    Chairman Bond. I was going to suggest that that would be a 
great place. We could use him on some of the heavy lifting.
    Mr. Everding. We certainly could use him.
    Thank you, Mr. Chairman, for permitting me to testify 
before this Committee.
    Chairman Bond. Thank you very much, Mr. Everding. It is 
disgusting when we see people preying on not-for-profits that 
are operating to do very, very important work using volunteers. 
This is, unfortunately, an occurrence when we talk about scams 
affecting small business. In the cramming hearing we had 
representatives from churches talking about how they had been 
abused by these unscrupulous operators. Thank you so much for 
telling your story and we hope that your example will serve as 
a warning to not-for-profits, charities, churches and others 
that they too can be victimized by these frauds.
    Mr. Everding. Yes, sir. We passed that information around 
to all of our fellow charities around the St. Louis area.
    Chairman Bond. We appreciate that and I hope that your 
story and your experience will be taken to heart by others.
    This is a busy day with other hearings. If you have further 
thoughts, as you hear from the other witnesses who are here, we 
would ask that you submit your questions or your further 
comments in writing within a week. Thank you very much for 
taking the time to come and tell your story, and we very much 
appreciate your being here.
    Now we will call Mr. Peter Grosfeld of Miami, Florida. 
Thank you, Mr. Grosfeld, and welcome.

          STATEMENT OF PETER GROSFELD, MIAMI, FLORIDA

    Mr. Grosfeld. Thank you. Good morning, Mr. Chairman. Thank 
you for allowing me to testify at your hearing, ``Swindling 
Small Businesses: Toner-Phoner Schemes and Office Supply 
Scams.''
    I began working for ABC telemarketing in June 1997. I was 
hired to be their telemarketing manager and was placed in 
charge of their main phone room. My job was training all the 
new hires and making sure that the FTC-approved phone 
presentation was the only one being used. Before I was hired, 
the FTC had shut this company down. Prior to being allowed to 
resume business they had to place a performance bond and the 
FTC had to approve their phone presentation. I was hired to 
make sure that the telemarketers were complying with this new 
phone presentation.
    This company's main product was copier toner. They sold 
toner to schools, religious institutions, daycare centers, 
banks, and basically any type of small business. Any business 
could fall victim to their sales practices. The size of the 
business was not important. Having enough leads for the 
telemarketers to call on a daily basis was.
    The phone presentation being used by the employees that 
were hired before the FTC sanctions implied that the call was 
being made by the customer's normal supplier. For example, 
``Hi, this is Peter and I am just calling to double-check the 
model number of the photocopier.'' The key words here are, 
double-check. They imply that we know the model number of the 
photocopier and thus we are your normal supplier.
    Once this model number was given, the telemarketer was 
trained to name the machine. For example, the person would come 
back and say model number 2020. The telemarketer would say, 
``That is your Xerox machine; that checks.'' Again leading the 
person to believe that the caller was their normal supplier. 
The rest of the phone script would continue that it was time 
again for their yearly sale and that we would be shipping your 
order a little bit ahead of when you would normally get it so 
that you would be able to take advantage of it. As a handshake 
they would ask the person to spell their last name.
    The mistaken shipment pitch was also being used by former 
employees that returned after the sanctions and it started the 
same way. After the model number was established the 
telemarketer would tell a story about another company close by 
that had the same machine, and that they were sent toner before 
it was realized that they had switched machines. Since this 
company was just down the road, would it be possible if we sent 
their toner over to them a little bit ahead of when they would 
normally call to order it?
    As a new person in the phone room learned the approved 
phone presentation they would be moved closer to the older 
employees where they would learn the different variations of 
the pitch. The only printed copy of the phone script was the 
approved one. Every once in a while I would find a handwritten 
copy of a non-approved phone presentation but everyone was told 
to keep those out of the building. They had learned from their 
previous FTC raid what not to have in the phone room.
    Since this phone call's real objective was to trick a 
person into placing an order, the price was never discussed. 
The telemarketers were never trained in the prices of the toner 
they were selling. Not only was the price of the toner not 
discussed; the amount of toner being shipped was never 
discussed either. Technically, a sale had not been made. The 
price and quantity of toner had not been established. The 
following day is when the sale was made. The day after the 
original call was placed, a confirmation sales call was made. 
This call was taped and most of the information about the sale 
was disclosed.
    For example, ``Hi, my name is Peter and I am calling from 
the ABC company on a recorded line about the toner that you 
ordered yesterday with Sally. I am calling back today to go 
over the shipping and billing information so that we can get 
this toner over to you. The order called for eight, but we are 
only shipping four boxes of toner at 250 a box for a total of 
10 54 98. Your address is 1410 West Main Street, on and on.''
    If the person objected, the tape was stopped. If the 
objection was overcome, the tape would be resumed. If not, the 
tape would be rewound for the next call.
    The amount of toner that was ordered was important to get 
on tape because it enabled the shipping of future toner. This 
second call was made as soon as the first payment was received. 
``Hi, this is Peter from ABC telemarketing and just letting you 
know that the second half of your order is on the way to you. 
You remember, last month's toner was for eight boxes but we 
only shipped you four. We just shipped the remaining four boxes 
of toner and they are on the way out to you; we will call you 
next month when your regular order goes out.''
    From then on a call was made every single month notifying 
that this month's regular order just went out and we would call 
next month when the regular order was to be shipped. This would 
continue until someone questioned the price or noticed that 
they should not be paying for toner.
    After working for this company for approximately 2 months I 
started catching on to what was happening. As the new employees 
left my direct control they would start learning variations of 
the phone pitch. This enabled them to have more orders, thus 
earn larger bonuses. I brought this to the attention of the 
owner and he assured me that he would look into it and fix the 
matter. I kept bringing it up at all meeting for about 3 weeks. 
I was then taken out of the main phone room and placed into the 
confirmation sales room.
    It was during my time in the confirmation phone room that I 
learned the true nature of the business that I was working for. 
The 50-plus telemarketers in the main phone room were really 
only looking for people who either were new at their job or 
just plain did not care. The first call was set up for the 
confirmation call. The confirmation call was geared only to get 
the person on tape so that their company could be sent a bill 
for about $1,000. Then just wait and see who paid, keep on 
sending toner and charge outrageous amounts of money until 
someone noticed.
    In conclusion, I would like to express the need for much 
stiffer penalties for any company or their owners that are 
caught and convicted of telemarketing fraud.
    Thank you for the opportunity to testify before this 
Committee.
    [The prepared statement of Mr. Grosfeld follows:]


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    Chairman Bond. Mr. Grosfeld, ABC telemarketing obviously is 
a supposed company name. Was this a single person--who was the 
real brains behind this operation?
    Mr. Grosfeld. I was told not to answer any specific 
questions at this hearing, Mr. Chairman.
    Chairman Bond. All right. Do you know how much he collected 
in checks.
    Mr. Grosfeld. Yes, I do. I can tell you that every Monday 
morning there would be a little party at about 10 o'clock when 
the checks totaled over $250,000. And that was every single 
Monday morning.
    Chairman Bond. Just thinking generally without getting into 
the specifics here, what kind of enforcement actions would be 
effective to take the man behind ABC telemarketing and people 
of his ilk out of the field permanently? Do we need criminal 
sanctions?
    Mr. Grosfeld. I do believe that they do border on criminal 
practices. But I believe the money is what they are after, so 
one of the main things that has to be done is taking their 
money away. Most of the fines that I am reading about or 
hearing are basically slaps on the wrist, and it is the cost of 
their doing business.
    Chairman Bond. Three hundred hours of community service is 
not much of a deterrent unless they show up at Feed My People. 
I want to be there to watch that community service. But I think 
that that might be a problem.
    Do you have any information regarding whether your former 
employer is continuing to engage in similar activities?
    Mr. Grosfeld. As of right now, no, I do not.
    Chairman Bond. Thank you very much, Mr. Grosfeld. As I said 
earlier, we will have additional questions for the record. We 
very much appreciate your coming to be with us and giving us an 
inside look at how these scams operate.
    Mr. Grosfeld. Thank you, Mr. Chairman.
    Chairman Bond. Thank you, sir.
    Now I would like to call Mr. William R. Duffy, president 
and chief executive officer, Imaging Supplies Coalition for 
International Intellectual Property Protection Inc. of 
Lexington, Kentucky, and Ms. Tricia Burke, vice president of 
Office Equipment Company, Inc., Louisville, Kentucky on behalf 
of Independent Office Products and Furniture Dealers 
Association of Alexandria, Virginia.
    This has got to be a major headache for your business. Let 
me now call on Mr. Duffy to begin the presentation.

 STATEMENT OF WILLIAM R. DUFFY, PRESIDENT AND CHIEF EXECUTIVE 
     OFFICER, IMAGING SUPPLIES COALITION FOR INTERNATIONAL 
   INTELLECTUAL PROPERTY PROTECTION INC., LEXINGTON, KENTUCKY

    Mr. Duffy. Thank you, Mr. Chairman. I am delighted to have 
the opportunity to speak to you today regarding the toner 
phoner schemes that are swindling small businesses and costing 
manufacturers an estimated $125 million annually at 
manufacturer's cost and also causing significant damage to 
their brand reputation and loyalty.
    The Imaging Supplies Coalition is a non-profit trade 
association made up of original equipment manufacturers of 
consumable supplies such as toner, toner cartridges, ink 
cartridges, and ribbons, and also the equipment in the printer, 
copier and fax industry. The members of the coalition are 
Brother International, Canon, Epson, Konica Business 
Technologies, Katun, Lexmark, OKI, and the Xerox Corporation.
    The mission of the coalition is to protect our members' 
customers from misrepresented products and services by seeking 
worldwide protection of intellectual property and related 
assets of the imaging supplies industry's distributors, 
suppliers, and manufacturers. This is accomplished by training 
and education in counterfeit product identification, methods of 
product security, techniques for avoiding telemarketing fraud--
the focus of today's hearing--and by promoting laws and their 
enforcement.
    Since you have already heard this morning about these scams 
I will focus my testimony on the scope of the problem that has 
been plaguing our industry for approximately 20 years. I will 
also discuss the trends we see and what the ISC members and 
other OEM's have done and actions we plan to take to curtail 
the fraudulent telemarketing of copier and printer toners and 
cartridges.
    A 1999 survey of original equipment manufacturers in the 
industry estimated that intellectual property violations exceed 
$1 billion at retail per year on a worldwide basis. 
Telemarketing fraud was reported as the second largest problem; 
second only to product counterfeiting.
    The revenue impact is almost double what was reported in 
our 1997 survey. Twenty percent of the respondents reported a 
significant increase in telemarketing fraud, 30 percent a 
moderate increase, and 30 percent said that it had remained the 
same. The survey also revealed that 90 percent of the 
companies' complaints regarding telemarketing fraud came from 
their end user customers, while 10 percent came from authorized 
dealers and companies' own employees.
    Xerox alone receives over 5,000 complaints a year. Of the 
complaints received, 39 percent report being victimized while 
61 percent reported attempted solicitations. This ratio of 
attempts versus swindles has improved since our 1997 survey 
which I would like to think is a direct result of our various 
education programs and the anti-telemarketing fraud programs by 
the FTC and others.
    Revenue impact and lost profits are only part of the 
problems manufacturers must contend with as a result of this 
illegal activity. Perhaps even larger than the financial loss 
is the damage done to the company's brand and customer loyalty. 
OEM's spend virtually hundreds of millions of dollars in 
product development and manufacturing to ensure that their 
customers receive the highest quality printed output from their 
printers, copies, and fax machines. In cases where the 
telemarketing fraudsters do deliver the product it is often of 
lower quality resulting in poor output and can also cause 
damage to the machines.
    This results in technical support hotline calls, service 
calls, and dissatisfied customers. Customers look to the 
manufacturer to solve these problems and the OEM's do address 
them at considerable expense since they want to ensure customer 
satisfaction and continued brand loyalty which certainly 
affects future hardware and supplies purchases.
    Additional problems are created for the legitimate hardware 
and supplies resellers. Many of them are small, independent 
businesses who invest in sales and service training, product 
inventories, and sales, service, and marketing expense. They 
must compete with these scam artists, and like the 
manufacturers, lose revenue, profits, and must service the 
customers once the fraud is discovered. State, local, and 
Federal Governments lose when legitimate jobs are lost and 
taxes are not paid. Basically everyone loses but the scam 
artist.
    Recognizing all of these problems and wanting to ensure 
customer satisfaction, the OEM's have undertaken various 
programs to educate their employees, resellers, service 
providers, and end users. The Imaging Supplies Coalition has 
developed and implemented a telemarketing incident reporting 
process for the OEM's who did not already have one in place. 
This closed-loop process ensures that complaints are captured, 
reported, and most importantly, that the customer is satisfied. 
Since our inception in 1994, we have published numerous 
articles on the subject in various industry trade publications 
which are targeted at the manufacturers and resellers in the 
industry. We have also published a number of end user articles.
    As part of our efforts to educate our resellers, we speak 
at industry seminars sponsored by various industry trade 
associations such as BTA, the Business Technology Association, 
what was formerly BPIA, now known as the Independent Office 
Products and Furniture Dealers Association, as well as 
conferences sponsored by various resellers.
    We publish a quarterly newsletter. We have established a 
web site. It describes how to spot a scam, the FTC 
Telemarketing Sales Rule, and links to the FTC web site and 
various consumer protection agencies, as well as the OEM's. We 
even provide a list of all 50 States' attorneys general offices 
and fraud contacts so that consumers can report these scams. 
All of this information, including our 1999 survey, is 
published and can be downloaded by our customers.
    We run an annual conference and in the past we have had 
representatives from the Federal Trade Commission and the 
manufacturers speak. We had Steve St. Claire from Iowa, a 
member of Attorney General Tom Miller's staff, discuss how his 
State has successfully dealt with fraudulent telemarketing 
including toner phoners. We have heard cases where 
telemarketing fraud boilerrooms post ``Do not call Iowa'' on 
the wall. This shows that measures can be effective and it is 
our goal to have all 50 States on the do not call list. In 
1999, we had both a keynote speech and telemarketing fraud 
seminar conducted by investigative reporter and the author of 
``Scam School,'' Chuck Whitlock.
    Last year, the Imaging Supplies Coalition was awarded an 
Association Advance America Award from the American Society of 
Association Executives for our telemarketing fraud process and 
education. In our short history, we have done a great deal to 
help combat these scams.
    The manufacturers are committed to continue to battle these 
crimes that so adversely impact their companies and their 
customers. You will hear later about Project BOSS, Banish 
Office Supply Scams, from the Federal Trade Commission. The 
members are committed to supporting that by distributing the 
materials from the FTC, linking to the web sites, and getting 
the word out to their customers.
    In summary, we have been battling these crimes for many 
years and we are making progress. The manufacturers have and 
will continue to spend considerable resources, both time and 
money, in the fight to stop this illegal activity. We believe 
by working together and utilizing all available Government 
resources we can have success in stopping these crimes and 
protecting our customers.
    I thank you for your time today and welcome any assistance 
you can provide us in our fight against telemarketing fraud.
    [The prepared statement of Mr. Duffy follows:]


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    Chairman Bond. Thank you very much, Mr. Duffy.
    Now, Ms. Burke.

  STATEMENT OF TRICIA BURKE, VICE PRESIDENT, OFFICE EQUIPMENT 
 COMPANY, INC., LOUISVILLE, KENTUCKY, ON BEHALF OF INDEPENDENT 
 OFFICE PRODUCTS & FURNITURE DEALERS ASSOCIATION, ALEXANDRIA, 
                            VIRGINIA

    Ms. Burke. Mr. Chairman, thank you for allowing me to 
testify today before you at today's hearing on this very 
important issue affecting small businesses like mine. I am here 
testifying as a small businesswoman and on behalf of the 
Independent Office Products and Furniture Dealers Association. 
Before I tell you about our association and what we are doing 
to combat this problem, let me first tell you about my 
business.
    I am Tricia Burke, vice president of OEC, Office Equipment 
Company, in Louisville, Kentucky. We are family-owned and -
operated and we were founded in 1907 by A.E. Meffert. My 
grandfather bought the company in 1934. Office Equipment 
Company has been in our family for three generations. OEC is a 
small family-owned company with 35 employees that sells office 
products and furniture, toner being one of our key products. 
OEC does about $8 million a year in sales and we lose roughly 
$25,000 a year in business due to telemarketing scams.
    Now that I have told you a little bit about myself and our 
company, let me focus the rest of my comments on how 
telemarketing scams are affecting my business and what we and 
the association are doing to combat this problem in our 
industry.
    Each year the office products industry loses $225 million 
to telemarketing scams. This is a staggering figure for 
companies like mine to comprehend. Not only are these scams 
having a detrimental impact on my industry, it is estimated 
that each year consumers lose roughly $40 billion to 
telemarketing scams.
    OEC receives about 60 complaints a year having to do with 
this issue. You might not think this is a significant number of 
complaints for a business to receive each year, but for one 
issue a small business like ours, OEC, this is a significant 
amount. My goal as vice president of OEC is to make sure that 
our company is competitive in today's marketplace while 
ensuring quality service to our customers. I am not able to 
focus on this goal when I am spending valuable time each day 
trying to figure out how we can fix the problem brought on by 
unscrupulous telemarketers.
    When I am focusing on how to handle ramifications on our 
business brought on by these types of scams that means there is 
less time for me to focus on our business and the customers we 
serve. This is a tremendous burden for small businesses like 
mine. We need to focus our attention and energy on our 
business, making sure they are profitable, that we are serving 
the customer, and not combating abuse by those trying to scam 
customers.
    Let me tell you a personal story of how telemarketing scams 
have affected my business and my relationship with my 
customers. Back in March 1995 a gentleman by the name of 
``Terry Sullivan'' was making phone calls to office products 
dealers throughout the States of Indiana and Kentucky letting 
them know that he was running a contract operator service for 
Ameritech pay phones and he was setting up a local office in 
the area. Mr. Sullivan was extremely knowledgeable of the 
office products industry. He told dealers that when his company 
orders from dealers his company has a policy that they pay 
their bills off statement at the end of the month and that a 
check would be cut within 5 days. We liked that.
    Mr. Sullivan proceeded to tell the dealer that he was in 
the market to buy transcribers and recorders. He bought four of 
each. An office products dealer in Indiana proceeded to deliver 
the merchandise to Mr. Sullivan's company. When the dealer went 
to collect at the end of the month, Mr. Sullivan was nowhere to 
be found. In fact, the bill was never paid, the phone was 
disconnected, and when the dealer went to the address given by 
Mr. Sullivan to see what was going on, all that was found was 
an empty office with empty transcriber and recorder boxes. That 
means he did get his merchandise.
    This was not an isolated incident, but happened to a number 
of small businesses in the Indiana and Kentucky areas. I hate 
to say it, but OEC was one of those small businesses that fell 
victim to Mr. Sullivan's illegal telemarketing scam. Our 
company received a call from ``Terry Sullivan'' back in 1995 
where he proceeded to tell our customer service representative 
a similar story. However, instead of ordering transcribers and 
recorders from OEC, he ordered a Panasonic microcassette 
recorder worth $300. When we followed up in our credit check 
process we discovered that the information Mr. Sullivan 
provided was false.
    As vice president of OEC, I do everything I can to make 
sure our employees are trained to catch these type of scams. 
But the sad reality is, until an individual actually 
experiences it firsthand or is knowledgeable about these type 
of scams, you do not know what signs to look for. Looking back 
I wish we would have done some things differently, as I can 
imagine everyone who has been scammed does. But unless 
something is done to seriously crack down on telemarketing 
scams, small businesses are going to continue to be a target. 
Today is the first step, but small business owners like myself 
need to be provided with the tools that will help us recognize 
the signs of these scams before we are bilked out of thousands 
of dollars.
    Now let me give you another example of how these scams not 
only hurt my business, but more importantly, my relationship 
with a customer. In the spring of 1998, a gentleman began 
calling companies in the Louisville area telling them that he 
was in the copier business and could provide them quality 
service at an inexpensive price. The gentleman proceeded to ask 
the companies he called for the model number of their copiers 
so that he could send them toner.
    When asked what company he was calling from, the gentleman 
informed the dealer he was calling from none other than OEC, 
Office Equipment Company. Shortly thereafter, we received a 
call from an OEC customer who had been contacted by this 
gentleman. The customer asked me if we called earlier trying to 
sell them copier products, and if so, why did OEC need their 
copier model numbers? I assured this customer, who has been 
doing business with us for years, that we were not making these 
calls and that we only sell them the products they order. We 
informed our OEC employees about this situation and let them 
know that someone was out there misrepresenting us. We wanted 
them to be aware of the incident and to keep us informed of any 
additional complaints.
    As a company, we may only receive 60 complaints a year from 
customers dealing with scams, but OEC receives dozens of calls 
a week from those trying to scam our company out of money or 
products. These scams range from selling us advertising in 
publications we have never publicized in or even heard of, to 
selling us light bulbs, janitorial products, copier toner and 
supplies. The caller will ask to talk to the person in charge 
of a particular department, the general office, maintenance, 
marketing, copy room, then proceed to use a hard sell approach. 
Those involved in these criminal activities hurt companies like 
mine who are legitimate resellers of office products and ``play 
by the rules.''
    Our association, the Independent Office Products and 
Furniture Dealers Association is working hard to combat it. We 
have come up with a brochure that we make available to our 
customers to be able to send out to their customers informing 
them of the situation.
    Chairman Bond. If you do not mind, we would like to have 
copies of that for the members of the Committee and for the 
record.
    Ms. Burke. Sure. We have hundreds for you.
    Chairman Bond. I do not need hundreds, but thank you.
    [Laughter.]
    Ms. Burke. This has been a wonderful opportunity for me to 
come before you and tell you how telemarketing scams are 
affecting my business. I would like, before I leave, just to 
offer a couple suggestions.
    Telemarketing scams are a problem in this country not just 
for businesses like mine but for businesses large and small. 
According to the FBI there are 14,000 illegal telephone sales 
operations bilking consumers in the United States every day. It 
is sometimes hard to distinguish between reputable 
telemarketers and criminals who are using the phone for 
fraudulent purposes. But if you know what to look for you can 
identify the ``red flags of fraud.'' This is why the best thing 
that the Government can do for businesswomen and men in this 
country is to provide them with educational tools and resources 
that will help them avoid being taken advantage of by 
telemarketing scams.
    Mr. Chairman, thank you for this opportunity and we would 
be happy to work with you on a solution to this problem, and we 
will answer any questions you might have.
    [The prepared statement and attachment of Ms. Burke 
follow:]



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    Chairman Bond. Thank you very much, Ms. Burke. Let me ask 
very briefly first, Mr. Duffy, can you give us any idea of why 
the frequency of this type of fraud seems to have increased so 
significantly? From your standpoint do you see any reason why 
this should be so much more prevalent now?
    Mr. Duffy. I think there are really a couple of basic 
reasons. First of all, there is dynamic growth in the industry. 
The industry is roughly a $25 billion industry in the United 
States growing at $28 billion in the next couple of years. 
There are some 52 million machines that use imaging supplies 
installed in millions of establishments in the United States. 
The compound growth rate over the last decade has been about 10 
percent year to year. So the industry is growing.
    I think that the penalties are low. They are not a 
deterrent to these telemarketing fraudsters. And frankly, I 
think we see the impact has doubled in our survey because, I 
think, we see better reporting of it. We see better reporting 
from our various constituencies.
    Chairman Bond. So it has been there but we are just now 
beginning to see the extent of it?
    Mr. Duffy. Right. I believe it is just the tip of the 
iceberg.
    Chairman Bond. That is scary. You have indicated some of 
the steps your members are taking. Are these fraudulent 
operators getting products from the original equipment 
manufacturers, from your people, or are they just dealing in 
the aftermarket? Do your individual members have a means of 
cutting off supplies to these fraudulent operators?
    Mr. Duffy. Typically, they do not buy from the 
manufacturer. There, of course, is a very legitimate 
aftermarket business in office supplies that many reputable 
companies represent. Typically, these people would buy the 
product offshore. In many cases it also involves trademark 
violations, certainly tradedress violations. You can see that 
on some of the examples up here today using the HP trademarks 
on the invoices, for example, and on the material itself.
    So there are some suppliers outside the United States that 
these people would buy the raw product from. Typically they 
repackage it, put their own labels on it, and as I mentioned 
there are other intellectual property crimes involved in it 
also.
    Chairman Bond. There are not, in your view, sufficient 
penalties to discourage those frauds?
    Mr. Duffy. I think as the previous witness said, it is a 
cost of doing business. It is a slap on the wrist. In my view, 
the only penalty that will work is some criminal action and 
jail time.
    Chairman Bond. Thank you. Ms. Burke, you said that you 
needed to get some additional tools to help prevent this kind 
of unfair competition which is not only a scam and a fraud on 
your customers, either potential or actual customers, but 
obviously a great loss to them. Are there any other tools that 
you would suggest? What kinds of things specifically do you 
need besides the information that you put out in your bulletins 
and other sources?
    Ms. Burke. I think the best opportunity to address this 
issue is, to educate consumers as much as we can. I know 
brochures are one way, but to keep talking about it; the whole 
idea of top-of-mind awareness. I know with our company when 
there are buyers of product, it is very important that people 
have effective procurement methods--that there really are 
designated people at a company who are the one and only who can 
make those purchases. Usually those folks, after week two of 
being in that position are extremely assertive at saying, 
``No'' on the phone, and they know that those things are not 
legitimate.
    But where there is danger is when people go on vacations 
and things like that and there is the temporary assistant 
person who is just doing it this week. I would encourage 
companies to have a game plan. We all have game plans when it 
comes to fire drills. Let us have a game plan when it comes to 
procurement so that there are designated buyers. When you do 
orientation of employees, people are made aware of this issue 
and that is enforced within a company.
    So I think the more education--I realize there is 
discussion here too regarding additional laws and things like 
that. I want to say that there are legitimate telemarketers out 
there, and in the office products industry there are very 
legitimate people who are calling and sell by phone. But to 
deal with the scam artist, it is very important to just say, 
``No;'' to come up with methods.
    Chairman Bond. Is your association working with local, 
State, and Federal law enforcement agencies? Do you have a game 
plan for getting these people turned over to the law 
enforcement community?
    Ms. Burke. I know we are involved with coming up with more 
educational processes. But to be honest, I do not know that--
awareness has been our key goal, but working with the different 
law enforcement agencies, I do not know at this point if we 
are.
    Chairman Bond. Thank you very much, Ms. Burke. Mr. Duffy, 
again we will have questions from the rest of the Committee. We 
thank you very much for your time and being here today.
    Now I would like to call the fourth panel, Ms. Jodie 
Bernstein, the director of the Bureau of Consumer Protection in 
the Federal Trade Commission. Again, welcome, Ms. Bernstein. 
Glad to have you back with us to discuss another fun and 
interesting area of fraud.

  STATEMENT OF JODIE BERNSTEIN, DIRECTOR, BUREAU OF CONSUMER 
     PROTECTION, FEDERAL TRADE COMMISSION, WASHINGTON, D.C.

    Ms. Bernstein. Thank you, Mr. Chairman. It is a great 
pleasure for us to appear at your hearings, which are 
especially valuable to us because they help to call attention 
to the particular issues that we have to face today. Nothing is 
better than making people aware of these scams so they can 
prevent them. Again, I will summarize the Commission's full 
statement, if I may.
    Chairman Bond. Your full statement will be made part of the 
record and we hope to have that avilable for the media and 
others, and I appreciate your making some summary comments.
    Ms. Bernstein. Thank you. I wanted to point out also, of 
course, that the Commission wants to thank you, Mr. Chairman, 
and the Committee again for holding these hearings.
    The FTC has had a long tradition of protecting consumers 
and businesses against fraud, including office supply fraud, 
and we appreciate the chance to discuss them with you and the 
Committee. In just the last 4 years the Commission conducted 
three law enforcement sweeps targeting office supply fraud, 
Operation Copycat, Operation Clean Sweep, and Operation 
Misprint. During these sweeps the Commission filed 19 Federal 
court actions against more than 45 companies and individuals. 
States and other Federal agencies participated in the sweeps by 
filing 17 additional cases of their own.
    Office supply fraud cases have a common pattern that 
starts, as you know and have heard from other witnesses, with 
the scammers placing an unsolicited telemarketing call to a 
small business or not-for-profit organization and they pitch, 
most always, copy machine or printer toner, hence the 
designation ``toner-phoner fraud.'' Generally the callers make 
the recipients feel as if they are dealing with their regular 
supplier.
    Sometimes the telemarketers try to get the name of the 
employee, or the brand or serial number of the copier the 
office uses under the guise that they are verifying existing 
records. At other times the caller merely asks the employee if 
the business wants to get a free gift or a sample. The bottom 
line is that through these false pretenses, the caller 
seemingly gets somebody's consent to ship office supplies or 
makes it appear as if the consent or the authorization has been 
given.
    Shortly after that, the business or the organization 
receives its supplies, sometimes, usually a smaller quantity 
and a lower quality than expected, and separately from the 
supplies, always an inflated bill. These bills usually contain 
information like an employee's name or the brand of copier 
machine that makes the bills really look legit.
    These sales practices are illegal and violate Federal laws 
like the Telemarketing Sales Act. The Telemarketing Sales Rule 
prohibits misrepresentations and requires up-front disclosure 
of the purpose of the call and the material conditions of the 
offer. We prosecute defendants to stop these practices, impose 
bans and bonding requirements on specific types of 
telemarketing, and obtain redress to give money back to the 
victims of the fraud. That is always our principal goal, to get 
redress and get the money back to the businesses that have been 
victims.
    As a result of settlements in several sweep cases and other 
FTC law enforcement actions, the Commission soon will be giving 
more than $4 million in redress to small businesses and not-
for-profit organizations that lost money to these scams. The 
Commission is pleased to announce that it obtained the largest-
ever civil penalty under the Telemarketing Sales Rule, 
$500,000, as part of a recent settlement in an Operation 
Misprint office supply case.
    Unfortunately, office supply scammers, as you have also 
heard, continue to prey on small business and others despite 
our and other's enforcement and education efforts. One reason 
is that the pool of potential victims seems to grow larger 
every year. That is why the Commission is announcing what we 
call Project BOSS. That stands for Banish Office Supply Scams. 
It is a new grass roots education campaign that seeks to stop 
fraud before it starts.
    Because of the tremendous growth in the number of new small 
businesses each year--and we are delighted with that figure--
educating new employees and volunteers to be aware of and on 
the lookout for office supply fraud must be an ongoing effort. 
Project BOSS builds on the past FTC education campaigns with 
expanded industry and business association partnerships and new 
materials for small business to use to banish office supply 
scams.
    With the help of our industry, business association, and 
Government partners, the Commission hopes to distribute 
educational materials to thousands of small businesses through 
mailings and web site links. We recently forged a new 
partnership with the National Association of Secretaries of 
State through which participating Secretaries of State will 
distribute BOSS materials to prospective new businesses at the 
time that they register in the State to do business. Hopefully, 
they will become aware of the problem by reaching them before 
they become victims.
    In addition, the Commission has created a page for small 
businesses on our web site that provides information about 
various office supply frauds and how to avoid them. The Small 
Business Administration, the Better Business Bureaus, 
Independent Office Products and Furniture Dealers Association, 
the National Federation of Independent Business, the Yellow 
Pages Publisher Association, the U.S. Chamber of Commerce, and 
others have created or will create links on their web site to 
ours.
    We also have a new animated and attention-grabbing public 
service banner ad for web sites that companies and 
organizations may use on their sites to link to the FTC web 
site, and a new tip sheet designed to look like a page from an 
employee manual that employers may post or give to new 
employees as part of training on office procedures. The Imaging 
Supplies Coalition, Business Technology Association, the 
International Sanitary Supply Association, and the Office 
Products Wholesalers Association all have agreed to distribute 
these and other educational materials to their members, 
reaching more than 4,000 manufacturers, distributors, and 
wholesalers of office products.
    In addition, the Commission will distribute a new 
Powerpoint and speech package that many people will be able to 
use to spread the message, which we hope will be effective. Our 
partners have helped us form this information chain, and 
hopefully as the chain grows and is implemented it will reach 
those who might fall victim to the fraud.
    The Commission is going to continue to attack office supply 
fraud in the courts as well. Through campaigns like Project 
BOSS, the Commission will continue to spread the message and 
take innovative measures in this effort to avoid fraud in the 
first place.
    Mr. Chairman, thank you again for giving the FTC the 
opportunity to testify on our efforts, and hopefully together 
we can bring more awareness to the American people about this 
very damaging practice. Thank you and I will be glad, of 
course, to answer your questions.
    [The prepared statement and attachments of Ms. Bernstein 
follow:]



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    Chairman Bond. Thank you very much, Ms. Bernstein. As I 
think we have mentioned to you before, a little over 30 years 
ago I was chief counsel of the consumer protection office in 
the Missouri Attorney General's Office, and you know some 
things never change. The technology is new, the scams are new, 
but the same old fraud are used. When you mentioned the sending 
out of the free gift, that was a red flag 30 years ago; it 
still works. An operating rule that I advised our citizens at 
the time was, if an offer sounds too good to be true, it is. Is 
that still operative today?
    Ms. Bernstein. It certainly is, Mr. Chairman. 
Unfortunately, these folks seem to be with us forever, and they 
do use new technologies and new techniques. So I guess the 
challenge to all of us is to try to use those techniques and 
new ways of catching them and preventing them in the first 
place. But certainly, if it sounds too good to be true, it is.
    Chairman Bond. I thank you for your great information 
efforts, and we are going to work with you and with the 
associations and with the witnesses we have had here today. But 
let us go to the law enforcement side of it.
    During the time we were investigating the problem the 
Committee uncovered two instances of individuals who were 
subject to enforcement actions by the FTC and the Postal 
Inspection Service for deceptively selling toner cartridges 
apparently engaging in the same activity several years later, 
merely using different company names. How large a problem is 
this recidivism? I get the sense that these people just take a 
fine or a requirement for community service as a cost of doing 
business and gear up and keep going. What is your assessment of 
the repeat offender situation?
    Ms. Bernstein. We believe that it is a problem, and a 
couple of years ago we really began to focus on it, on the 
recidivism, because we were seeing the same thing that you 
identified, Mr. Chairman. So we made a concerted effort to 
target some, slightly at least, different approaches to begin 
to deal with the recidivist particularly. First of all, we did 
bring 50 sweeps initially, and then we went back and looked at 
those to see if we could identify people who were engaged in 
the same activities.
    So we started first of all looking for stronger provisions 
in our orders. We are imposing bans and bonds, and that has not 
always been the case, significantly strengthening the 
Commission's orders.
    Then we began an operation we call Operation Scofflaw, 
which was really to bring attention and prioritizing our 
review, and monitoring and following up, on Federal court 
orders. In the past our orders had been administrative orders. 
Now for the first time the Commission has shifted to the 
Federal courts and we made a determined or dedicated effort to 
following those up.
    The increased penalties that we seek there are, of course, 
different than administrative cases. That is, we can seek civil 
and criminal contempt. And we have. So we have not had a huge 
number of people that have been subject to criminal contempt, 
but we have had some, and some jail sentences have been imposed 
on recidivists. So we are going to continue that effort. We are 
trying to work with the Justice Department and others to make 
that a more effective effort.
    Chairman Bond. That was going to be my second question, but 
you have answered it. It seems to me that when you go through 
the mill the first time, you can enter an order and they pay a 
fine. Having the additional order, having the court order I 
guess is essential to bringing a much higher penalty action 
against a subsequent involvement because once they go through 
the motions, having that extra noose around their neck would 
seem to me to be very effective. About how many of those 
actions have you taken? Are these usually brought against just 
the top individual in the company, or do you catch a number of 
people typically?
    Ms. Bernstein. Certainly we go after the top one. As you 
know, as a former prosecutor, of course, we have to have direct 
evidence of employees that might have been involved in it. We 
have brought cases against at least eight recidivists, criminal 
contempt actions. And to the extent that we can develop 
evidence--and of course, it is easier to get civil contempt 
than criminal, but we are really focusing on criminal contempt 
now. We will try to get as many of the others who were involved 
in the operation as we can. Principally, we have gone after the 
main operator.
    Chairman Bond. Mr. Grosfeld testified earlier that his ex-
employer was obtaining lists of businesses to call from 
commercial list providers. Again, Ms. Burke mentioned the fact 
that there are many legitimate telemarketers so you do not want 
to crack down on them. But are there any circumstances in which 
FTC has brought action against list providers who were working 
in concert with the toner-phoner fraud perpetrators?
    Ms. Bernstein. It is a tough one to say but it does kind of 
summarize what the whole thing is about. Yes, we have tried to 
focus on list providers, and as you know, the standard for 
going after a list provider who is a third party would be 
``assisting and facilitating,'' the legal standard, and to the 
extent that they knew that they were facilitating and assisting 
in the basic fraud--we have done that.
    We have actually pursued one list enterpriser by itself and 
actually brought a lawsuit under the Telemarketing Sales Act 
for those violations. That resulted in a considerable recovery. 
To the extent that we can include in our orders prohibitions on 
obtaining lead lists where we have found them to be abused in 
the past, we are also doing that. Then we can monitor that as 
we go forward.
    I meant to mention one other thing which I think may be 
effective in connection with recidivists, Mr. Chairman. That 
is, we are imposing in our orders requirements that the 
convicted or the defendant notify us of a change in employment 
and tell us where they are working if it is a new job or new 
opportunity so that we can monitor those activities. That 
should be helpful too in terms of following up on those people 
who seem to go from one enterprise to another.
    Chairman Bond. I will discuss with you later some ideas on 
how to follow up with them. I know that that is an interesting 
challenge.
    Let me ask one final question. Are there steps that we in 
Congress can take to help you minimize this deceptive activity, 
and particularly the repeat activities that seem to be hitting 
so many small businesses and not-for-profits?
    Ms. Bernstein. One thing that I have just briefly been 
thinking about is the extent of our penalties are $11,000 per 
violation. Now as you know, Mr. Chairman, that is an old 
statutory provision, and perhaps it has not kept pace.
    Chairman Bond. Mr. Grosfeld said $250,000 a week. You could 
clear a nice amount of money and still pay $11,000 a day if you 
are raking in $250,000 a week. That is not bad.
    Ms. Bernstein. That is right. And I mention it because I 
really think it has not kept pace with what Congress has 
imposed in other similar kinds of violations of various 
statutes. I thought perhaps in the future that might be 
increased substantially. It would help us a good deal, although 
as I said before, redress is where we get the big bucks, if we 
can locate the money.
    I suppose finally, the FTC is still pretty small for 
dealing with this extensive fraudulent operation. I know you 
have been supportive of us in the past in terms of helping us 
out with our resource needs.
    Chairman Bond. It all comes back to appropriations.
    Ms. Bernstein. Usually.
    Chairman Bond. Ms. Bernstein, my sincere thanks to you and 
to all our witnesses today. As I said, the record will be kept 
open for a week for any comments from the witnesses, or those 
who are here either in the audience or watching us by means of 
TV coverage. We will be asking Committee Members to review the 
record and submit any questions. We would ask that you reply to 
those as promptly as possible.
    And with our best wishes to everybody who is working to 
focus attention on this fraud, to help identify it and drive it 
out of business, our sincere thanks. The hearing is adjourned.
    [Whereupon, at 11:08 a.m., the Committee was adjourned.]


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